MIDDLE-MARKET
TRENDS REPORT
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Setting the Stage for 2018 Trends
Middle-market M&A strengthens in 2018
STRONGER M&A ACTIVITY IN
THE MIDDLE-MARKET ARENA
THIS YEAR WOULD BUILD ON
THE POSITIVE MOMENTUM
RECORDED IN 2017.

H

eightened private equity
investing, increasing valuations
and a growing number of deals
involving foreign buyers are
likely to drive U.S. middle-market activity
higher in 2018.
Stronger M&A activity in the middlemarket arena this year would build on
the positive momentum recorded in 2017.
Middle-market companiesâ&#x20AC;&#x201D;institutions
with annual revenue ranging from $10
million to $1 billionâ&#x20AC;&#x201D;were targets in
$100 billion in announced deals. That
represents a 14 percent increase from the
levels seen in 2016 and marks the highest
aggregate value for middle-market deals
since 2014, according to S&P Global
Market Intelligence data.
Middle-market M&A activity in 2017 was
bolstered by strength in the technology

space, which led all sectors in both the
number of deals and total deal value,
generating 90 transactions with nearly $22
billion in aggregate value.
Private equity firms also helped drive
middle-market M&A activity higher in 2017.
Leveraged buyout activity in the middlemarket space rose to $8.9 billion in 2017
from $6.7 billion a year earlier. The level
of activity last year marked the highest
disclosed dollar amount for middle-market
leveraged buyouts since 2013, when $10.5
billion in transactions occurred.
Private equity interest in middle-market
companies seems unlikely to wane in
2018, with firms holding in excess of
$1 trillion of so-called dry powder, or
capital raised but not yet deployed. For
instance, in January 2018 alone, Compass
Diversified Holdings LLC agreed to

U.S. Middle-Market M&A - Average TEV/EBITDA by Year
Average announced middle-market deal valuations based on TEV/EBITDA last year rose to the highest
level since 2014.

25
20
15
10
5
0
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Data as of 2/15/2018

MIDDLE-MARKET TRENDS REPORT | 1

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purchase Foam Fabricators Inc. for $247 million, and
Francisco Partners Management LLC announced plans to
acquire a controlling stake in health care technology firm
Connecture Inc. for $112 million.
Traditional strategic buyers should support further
M&A activity in the middle-market arena as well, as cash
in corporate America stands at extraordinary levels.
Calculations place total cash and investment holdings
among nonfinancial and real estate S&P 500 companies at
more than $2 trillion. The passage of tax reform should
cause that number to increase even further as companies
receive a windfall of profits from the corporate tax rate
falling to 21 percent from 35 percent.
As middle-market M&A moves ahead in 2018, we
anticipate valuations may edge higher. The average
valuation in 2017, based on a transaction’s total
enterprise value relative to a target’s 12-month trailing
EBITDA, rose to 19.3x from 16.3x in 2016, marking the
highest multiple since 2014.

*Transactions where a target’s annual revenue is between $10 million
and $1 billion, and disclosed transaction value is $1 billion or less.
Data as of 2/15/2018

While many economists believe the current U.S. economic
cycle could be entering the late stages, U.S. corporate
profits just recently reached a record level of $1.86 trillion
in the third quarter of 2017, according to the Federal
Reserve Bank of St. Louis. The surplus of cash and the
current phase of the economic cycle could increase buyers’
willingness to bid assets higher. Borrowing costs have
begun to rise and that could potentially deter some buyers,
but steady increases in interest rates last year failed to cool
activity or hinder valuations.
There remains strong interest from foreign buyers in
the U.S. middle-market space as well. Last year, the
disclosed value of foreign purchases of middle-market
U.S. companies exceeded $20 billion for the second
consecutive year, while the number of deals reached the
highest level since 2011.
As principal analyst at S&P Global Market
Intelligence, Richard Peterson provided in-depth
evaluation of capital markets activity from M&A
transactions, IPO issuance, corporate cash balances
and fixed-income underwriting.

2 | MIDDLE-MARKET TRENDS REPORT

TRENDSREPORT

Health Care

The S&P Capital IQ platform provides a powerful array of financial data, analytics and research. The web-based platform combines
deep information on companies, markets and people worldwide, featuring robust tools for analysis, idea generation and workflow
management. Utilizing the platform to examine the trends in health care over 2017, we see that demands and services for health care
continue to grow. Health care reform—involving the way care is provided, where it’s provided, the value received, and how it’s paid for
and funded—is a major issue, and all elements are under redesign in some way. Here’s a look at health care by the numbers.

TRANSACTIONS IN 2017 BY REGION

TOP FIVE

MOST ACTIVE SECTORS

618
307

61

1,060

48

HEALTH CARE SERVICES
544 Deals Completed

TARGET

HEALTH CARE FACILITIES

BUYER

$30.3 BILLION

370 Deals Completed

WAS THE LARGEST

HEALTH CARE
TRANSACTION IN 2017

TRANSACTIONS IN 2017 BY QUARTER

PHARMACEUTICALS

Q3

Q2

Q1

595

Q4

263 Deals Completed
522

496

481

HEALTH CARE EQUIPMENT

TRANSACTIONS BY YEAR

2018
YTD

2,094
Deals

2017

2,406
Deals

2016

2,699
Deals

2015

2014

2013

2,092
Deals

2,431
Deals

217 Deals Completed

HEALTH CARE TECHNOLOGY
213 Deals Completed

225 Deals

Source: S&P Capital IQ platform - Data as of 2/15/2018

MIDDLE-MARKET TRENDS REPORT | 3

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HEALTH CARE

Why Private Equity
Likes Radiology
Private equity interest in radiology is now
growing for many of the same reasons behind
the growth of emergency care and anesthesia

STEVE STANG
Principal
CliftonLarsonAllen

W

ith the passage of the Affordable Care Act in 2010, private equity
activity involving hospitals and contract-based specialty practices
began to increase significantly. Early on, much of this activity involved
emergency medicine, and several practice consolidators emerged during
this period. Anesthesia followed emergency medicine as the next top specialty focus
area for consolidators and private equity firms. Ironically, while radiology has long been
viewed as a leading field for adopting new technologies and practices, it has lagged
behind emergency medicine and anesthesia when it comes to private equity activity.
That appears to be changing now; private equity interest in radiology is now growing for
many of the same reasons behind the growth of emergency care and anesthesia.
Radiology is a highly fragmented $18
billion-plus industry. As reimbursement
continues to shift from volume to value,
hospital consolidation continues, and
technology and infrastructure needs
increase. More and more independent
radiology groups are determining that they
need to partner in order to prosper—and in
some cases, to survive.
In today’s health care environment,
imaging is increasingly becoming more
critical to improving the overall quality
of care, including for care coordination,
utilization management, big data, and
improved quality and outcomes.
Core market drivers that make radiology
appealing to private equity include:
ɒɒ

Market size

ɒɒ

Highly fragmented market

ɒɒ

Favorable demographics (i.e.,
aging population)

4 | MIDDLE-MARKET TRENDS REPORT

ɒɒ

Increasing technology costs

ɒɒ

Need for improved back-office
operations

ɒɒ

Increasingly central role in
population health management

ɒɒ

Importance of scale for success

Private equity groups recognize the
tremendous opportunity to scale
the business model. There are many
groups that can act as platform
investments to scale to regional or
national providers. In fact, the largest
independent radiology groups in the
country continue to grow. Radiology
Business reported in its 2017 Top 100
listing that the number of groups with
65 or more full-time-equivalent, or FTE,
radiologists grew to 28 in 2017 from
eight in 2009. The average number of
FTEs in the top 10 groups increased to
121 in 2017 from 100 in 2015.

TRENDSREPORT
HEALTH CARE
In addition, there are a tremendous number of add-on opportunities.
The Radiology Business 2017 ranking showed that the top 50 groups had
a combined 3,837 radiologist FTEs—only 12 percent of the more than
30,000 radiologists estimated nationally.

The 50 Largest Radiology Groups Are Growing
Average Number of Radiologists - Full-Time-Equivalents

2015

Several factors that make private equity attractive to radiology
groups include:

Physician leadership – First and foremost, quality of care is the most
critical factor when deciding to partner. Unlike acquisitions by hospitals,
radiology groups acquired by private equity often retain control over
things like care protocols, hospital relationships, scheduling and other
patient-centered activities.

105

Personal liquidity – Often a radiologist’s largest personal asset is the
value of his practice. By selling the practice to a private equity firm, the
radiologist can better diversify his personal portfolio and mitigate risk.

73

Shifting radiologist demographics – As baby boomers age, a large number
of retirements are expected in the coming years. These retirees are often
being replaced by younger radiologists who are less interested in running
the business side of a practice.
Top 26-50 Groups

55

Steve Stang is a principal at CliftonLarsonAllen with more than 26
years of experience. He currently serves as the firm’s health care
transactions services practice leader.

69

All these factors are increasing private equity investment in the
radiology space, and this trend is expected to continue for several years.

54

Long-term gain – Almost every private equity transaction will require
the radiologists to roll over part of their equity. However, it allows the
radiologist to participate in potential gains when the private equity
group exits its position in five to seven years.

0

30

60

90

120

Source: Radiology Business’ 2017 “Radiology 100” Ranking

MIDDLE-MARKET TRENDS REPORT | 5

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Retail

Utilizing the S&P Capital IQ platform to examine trends in retail over 2017 shows that retail isn’t dead, but it is declining. With a lack
of millennial brand loyalty impacting retailers, many consumer products companies are turning to digital technologies and in-house
venture capital funds to drive innovation and differentiate themselves. Here’s a look at retail by the numbers.

To Stay on Trend,
Retailers Are Changing
the Way They Market
Disruptors are reshaping consumer behavior and, in
response, retailers are stepping up their game

CAROL LAPIDUS
National Industry Practice Leader
RSM US LLP

R

etail is in a state of conventional disruption and vital transformation,
from the tremendous growth in consumers’ use of e-commerce to the rise
of personalized mobile shopping apps and elaborate in-store shopping
experiences. Thriving brands and retailers are addressing these changes
head-on to meet consumer needs, reinvigorate their brands, stay relevant and remain
profitable. RSM’s national industry practice leaders, Carol Lapidus, consumer products,
and John Nicolopoulos, retail and restaurant, share their insights.

What has changed in terms of
how retailers are marketing and
selling to consumers?

JOHN NICOLOPOULOS
National Industry Practice Leader
RSM US LLP

Carol Lapidus: Consumers want
convenience and value, and these key
preferences are changing the way retailers
market, engage and sell to them. For
instance, we’re seeing an increase in
subscription-based services, particularly
for apparel, where apparel and accessories
are curated for the individual consumer
based on his or her personal choices.
This saves consumers time and effort
since the shopping is done for them.
Companies like Stitch Fix are capitalizing
on this trend. They’re appealing to busy
consumers because they offer desired
products and act as a personal stylist all in
one convenient service at a bundled price.
In addition, while we know online shopping
is desirable for shoppers, we’re still seeing
70 to 80 percent of shopping occur at
brick-and-mortar stores. However, physical
stores are not always about vast quantities

of products in every size and color. Rather,
some innovative stores, like the newly
launched Nordstrom Local, have created
experiential showrooms where consumers
can meet with a personal stylist, sip a latte,
get a manicure, and be pampered as they
consider clothing purchases.

WHILE WE KNOW ONLINE
SHOPPING IS DESIRABLE
FOR SHOPPERS, WE’RE STILL
SEEING 70 TO 80 PERCENT
OF SHOPPING OCCUR AT
BRICK-AND-MORTAR STORES.
HOWEVER, PHYSICAL
STORES ARE NOT ALWAYS
ABOUT VAST QUANTITIES OF
PRODUCTS IN EVERY SIZE
AND COLOR.
It’s truly a shopping destination, but
shopping may not be the primary
objective for the consumer. It’s about the
memorable experience.

Given this fast-moving climate of change
and disruption, are private equity firms
investing in retail and if so, where?

Another interesting way retailers are reaching out and
selling to customers is through social media outlets
like Snapchat or Instagram. Products are featured on
these channels and with a tap, consumers move on to
more information or the ability to purchase products
seamlessly. Retailers are using this strategy more and
more to form connections and provide convenient
shopping avenues for their customers.
John Nicolopoulos: Digital media marketing and sales
methods like this are essential for today’s retailer. To
be successful, retailers need a multipronged strategy
to engage and sell to consumers, and an omnichannel
approach is key, from interacting with the customer on
social media, and providing helpful product information
and reviews online, to offering a complementary
showroom experience.
Likewise, another change or disruptor we’re seeing in
retail is the growing importance of social influencers.
Consumers are getting inspiration from fashion bloggers,
for instance, who might feature an outfit of the day or a
limited supply of an exclusive product. These influencers,
sometimes compensated by retailers or apparel
manufacturers, churn up excitement and urgency around
products and can be drivers for sales. It’s a definite gamechanger for retail and another way to connect, nurture
8 | MIDDLE-MARKET TRENDS REPORT

John Nicolopoulos: We all know retail is changing. That
frightens those who believe retail is dying and it excites
those who equate change with opportunity. We continue
to see private equity investment flowing toward retail,
although the categories of greatest interest have evolved
with consumer spending. For instance, as residential
real estate markets have improved, we’ve seen increased
investment activity in home furnishing companies as
consumers invest more in their homes. We’ve also seen
private equity investment follow consumer spending on
health- and beauty-related retail businesses. Americans
are spending more on health clubs, spas and salons, and
private equity firms are trying to capitalize on those
trends. We’re seeing investment in a broader spectrum of
retail businesses, far beyond more traditional categories
that come to mind when we think of traditional retail.
We’ve also seen upticks in related businesses that
support retail, specifically technology businesses that can
support the changing expectations of the U.S. consumer.
The digital transformation of the retail environment
has spawned the growth of technology companies
specializing in this space. We’ve seen investment in
these companies come from a variety sources. Although
not direct investment in the retailer, we’d be remiss not
to acknowledge investments being made in businesses
supporting and driving change through the retail
industry, whether from venture firms, private equity firms
or large strategic acquirers.
Read more in RSM’s “Dealing with Disruption: Retail’s Challenge
and Opportunity” at www.rsmus.com/retaildisruption.
Carol Lapidus is RSM’s national industry practice leader
for consumer products; John Nicolopoulos is the firm’s
industry practice leader for retail and restaurants.

TRENDSREPORT

Regulation

The Securities and Exchange Commission has indicated that it will prioritize efforts to protect retail investors, which could signal a
reduction in its examinations of private equity advisers. Under the leadership of SEC Chairman Jay Clayton, who was sworn in last
May, the commission has also expressed a desire to reduce unnecessary compliance burdens, although how the SEC will implement its
priorities under its new leadership remains to be seen. For now, here’s a look at the how the SEC approached enforcement in 2017.
THE SEC’S NATIONAL EXAM PROGRAM
The Office of Compliance Inspections and Examinations conducts
the SEC’s National Exam Program (NEP). The NEP’s stated mission is
to protect investors, ensure market integrity and support responsible
capital formation through risk-focused strategies intended to:

IMPROVE
COMPLIANCE

PREVENT
FRAUD

MONITOR
RISK

INFORM
POLICY

IN FISCAL YEAR 2017

THE U.S. SECURITIES AND
EXCHANGE COMMISSION

Obtained judgments and
orders totaling more than

$3.7 BILLION
IN DISGORGEMENT
AND PENALTIES

In fiscal year 2017, the NEP completed over

2,870 EXAMINATIONS

an 18 percent increase over FY 2016

BROUGHT A DIVERSE MIX OF

754 ACTIONS
196 were “follow-on” proceedings seeking bars
based on the outcome of commission actions or
actions by criminal authorities or other regulators.

In fiscal year 2017, the NEP completed over

2,100 EXAMINATIONS

OF INVESTMENT ADVISERS

a 46 percent increase over FY 2016
The SEC’s examination coverage included
15 percent of all investment advisers,
up from 8 percent just five years ago.

446 were “stand-alone” actions brought in
federal court or as administrative proceedings.

112 were proceedings to deregister public
companies—typically microcap—that were
delinquent in their commission filings.

n September 2017, the Securities and Exchange Commission revealed an important
business and enforcement goal: the establishment of a retail strategy task force that
would focus exclusively on the protection of individual investors—an effort that has,
in many ways, brought the commission full circle.

Joseph Kennedy, the commission’s very
first chairman, said it best. The “cards have
been stacked too close to those who have
power,” he said. “The federal government
is the only power which can assure to the
buyer that he is purchasing gold value and
not gold bricks.” The current chairman,
Jay Clayton, echoed Chairman Kennedy’s
sentiments: “There is no room for
someone who ruins somebody else’s life
using the capital markets.”
It is obvious that investment products
and risks have changed significantly
since Chairman Kennedy warned against
the sale of “gold bricks.” So what issues
can we expect regulators to examine in
today’s markets as they train their sights
on retail advisers?
In an October 2017 speech, the
commission’s co-chief of enforcement,
Stephanie Avakian, offered a clue.
“Issues in this space are extensive,”
she said, “and often involve widespread
incidents of misconduct, such as
charging inadequately disclosed fees,
and recommending and trading in wholly

10 | MIDDLE-MARKET TRENDS REPORT

unsuitable strategies and products.” She
identified the following additional areas
of concern:
ɒɒ

Steering customers to mutual
fund shares with higher fees,
when lower-fee shares of the
same fund are available.

ɒɒ

Buying and holding products like
inverse exchange-traded funds
(ETFs) for long-term investment,
when they are generally used as a
temporary downward hedge.

ɒɒ

Selling structured products that
fail to fully and clearly disclose
fees and other factors that can
negatively impact returns.

ɒɒ

Churning and excessive
trading that can generate large
commissions at the expense of
the investor.

Inadequate disclosure and suitability are
hardly new offenses; why, then, does it
seem that retail fraud is more common
than ever? One reason, ironically, is

TRENDSREPORT
REGULATION

the Dodd-Frank Act. It essentially directed the SEC
to de-register all small (primarily retail) advisers and
leave regulation to the states, where oversight and
enforcement practices are inconsistent, unreliable and
resource-constrained.

INADEQUATE DISCLOSURE AND
SUITABILITY ARE HARDLY NEW
OFFENSES; WHY, THEN, DOES IT SEEM
THAT RETAIL FRAUD IS MORE COMMON
THAN EVER? ONE REASON, IRONICALLY,
IS THE DODD-FRANK ACT.
But Dodd-Frank got it backward. Rather than requiring
registration of all the largest advisers, Congress should
have required oversight of all the smallest managers,
since institutional investors are generally more capable of
detecting fraud and mismanagement than are “Mr. & Mrs.
401(k),” as Chairman Clayton calls them.

of instilling confidence and fairness into the securities
markets. As he signed, the president asked, “Now that
I have signed this bill and it has become law, what kind
of law will it be?” An aide replied, “It will be a good or
bad bill, Mr. President, depending upon the men who
administer it.”
Prioritizing the protection of Main Street investors
answers President Roosevelt’s question affirmatively: The
bill creating the Securities and Exchange Commission is a
very good one indeed—as measured by the men, and now
women as well—who are administering it.
Rosemary Fanelli is a managing director and chief
regulatory affairs strategist for Compliance and
Regulatory Consulting at Duff & Phelps. She joined
Duff & Phelps in January 2016 as a result of Duff &
Phelps’ acquisition of CounselWorks, a firm she cofounded and ran for almost 10 years.

In 1934, President Franklin Roosevelt signed into law
a bill that vested a new agency with the responsibility

often hear intermediaries say, “I’m
only offering unregistered securities,
so I don’t have to be registered.”
Wrong. Whether the securities are
registered (’33 Act) has nothing to do
with whether the individuals offering
securities are required to be registered
(’34 Act). “But I’m not offering securities;
I only do M&A.” “My deals only involve
one buyer and one seller.” That doesn’t
change anything. “I’m not a broker. I’m a
consultant.” The SEC and FINRA don’t
care what title you give yourself. Go ahead
and call yourself the Wizard of Oz.
The first question is whether you are ever
acting as an intermediary in the offering of
securities. Activities involving capital raising
(public or private) require registration.
Even if you never raise capital, you may still
be involved in a securities transaction. If a
private company is sold to another private
company and the stock on the balance sheet
is changing hands, then you are a party to
a securities transaction. Even in the M&A
world, if an unsecured seller’s note is part of
the transaction, that too is a security.
The next issue is compensation. The
SEC says that if you are assisting with a
transaction involving securities and are
paid based on transaction value then you
are earning a commission on a securities
transaction. Registration as a broker is
required. Flat fees earned for advising do
not require registration, but if you receive
variable compensation without registration,
you are running a risk. Even if you don’t
initially expect a security will be involved,
deal terms often change on short notice.
There may be some relief provided under

12 | MIDDLE-MARKET TRENDS REPORT

the SEC’s M&A no-action letter (Jan. 31,
2014), but it may be difficult to prove the
intermediary is acting under the exact fact
pattern contained in the no-action letter.
If the SEC or state determines after
a closing that you should have been
registered, the consequences are dire.
You may not be paid upon a transaction
closing because a party to the deal realizes
you were not registered. Regulatory
authorities may require rescission and
disgorgement of profits. Fines may be
levied, and cease-and-desist orders
become public record. Such situations are
low-hanging fruit for investor lawsuits.
You have worked too long and hard to
have your reputation ruined.
There are deals where registration is not
required. Asset sales are not securities
transactions. However, more institutional
investors will not look at any deal offered
by unregistered intermediaries. The lack
of registration becomes a credibility issue,
yet no regulations have been violated.
You have options to consider. You may
choose to ignore the securities laws and
operate as an unregistered intermediary.
Or you may opt to form your own brokerdealer. The final option is to affiliate with
an existing broker-dealer. There are pros
and cons to each.
Carrie Wisniewski is a former FINRA
examiner and the founder of B/D
Compliance Associates, Inc. and Bridge
Capital Associates, Inc. (member FINRA,
SIPC). You can reach her at
carrie@bd-compliance.com.

TRENDSREPORT

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